27 the door to a retroactive application of the proposed rule. Of additional concern, the proposing release indicates that the new proposed rule is not intended to be an exhaustive assessment of underwriter liability in deSPAC transactions and that the SEC or federal courts may in the future find that other parties involved in a de-SPAC transaction, including financial advisors, PIPE investors or other advisors, are “statutory underwriters” if they are purchasing from an issuer with a view to distribution, selling for an issuer or are merely “participating” in a distribution of securities in a deSPAC transaction, regardless of whether they also acted as underwriter in connection with the SPAC’s IPO. Investment banks have historically avoided underwriter status for de-SPAC transactions for a number of reasons, including that registration statements for de-SPAC transactions frequently include projections and banks are uncomfortable assuming liability for that information due to its inherent uncertainty. For the same reason, company projections are not included in registration statements for traditional IPOs and instead information derived from company projections is conveyed to investors by other means. In a traditional IPO, the SEC does not mandate the inclusion of projections, and the SEC does not seek to impose liability on financial advisors, placement agents or banks who are simply paid pursuant to the terms of an existing engagement letter. Given that the registration statement in a de-SPAC transaction must include any projections provided to the SPAC’s board of directors under existing SEC rules and practice and a SPAC board of directors fulfilling its fiduciary duties has incentives to request and review target companyprojections,weexpect that thisexpansive interpretationwill cause many banks to simply refuse to participate in de-SPAC transactions and insist on receiving their full underwriting compensation in the SPAC IPO rather than deferring a portion of it, as is current market practice in many transactions. This would make executing de-SPAC transactions more difficult andwould increase the upfront costs of a SPAC IPO, thereby having a significant chilling effect on SPAC activity. At least one major bank has announced a pause on SPAC transactions pending clarity from the SEC. We are hopeful that the SEC will amend the proposals before adopting them, but if the Commission does not do so, it is likely that the alternative exit path offered to Israeli companies by SPACs will be significantly limited or eliminated. Michael Kaplan and Lee Hochbaum are partners at Davis Polk & Wardwell LLP and co-heads of the firm’s Israel practice. Michael is a member of Davis Polk’s Management Committee and head of the firm’s Corporate Department. Lee co-heads the firm’s SPAC practice.
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